By Dennis Polhill, Orogdol Sanjaasuren
The 20th century gave witness to a Titanic ideological struggle between collectivism and property rights. The 1990s closed the century with dramatic events symbolizing the victory of freedom over tyranny. The Berlin Wall sought to contain East Germany’s population. Its fall in November 1989 signified colossal economic and political change. Every week another dictatorial regime fell. The Soviet Union ceased to exist on March 17, 1991. Newly Independent States (NIS) rushed to draft constitutions enumerating individual rights comparable to those of Western nations. But the declaration of rights and freedoms was insufficient to yield instant affluence. These NIS would suffer tragically, while struggling to make their economies serve their people. Collectivism had destroyed the fundamentals: property rights, rule of law, work ethic and incentives. In their place were oppressive regulations, burdensome taxes, and proliferation of black markets, graft and corruption. Some would suffer more than others. The differences are a product of political courage, wisdom and leadership. The comparative experiences of the NIS offer valuable lessons.
In little more than a decade after disintegration of the Soviet Union, Estonia has become one of the most economically free nations in the world. The Heritage Foundation 2004 Index of Economic Freedom rates the nations of the world and gives Estonia an index of 1.76 that ranks it as 6th behind Hong Kong, Singapore, New Zealand, Luxembourg and Ireland. The United States is ranked tenth. Estonia’s 1.4 million people enjoy a GDP/capita of $4,984. By contrast, the economies of other NIS, Moldova and Mongolia produce only $678/capita and $430/capita and are now known as the most impoverished nations in Europe and Asia respectively. By what means did Estonia create so much wealth: 7.3 times that of Moldova and 11.5 times that of Mongolia?
Estonian Prime Minister during six of these transition years, Mart Laar, credits three fundamentals: (1) “There can be no market economy and democracy without laws, clear property rights, and a functioning justice system;” (2) “be decisive about reforms and stick to them despite the short-term pain they bring;” (3) change the culture of socialism so that people think for themselves to make decision and take responsibility. Estonia became a free trade zone in 1992, abolishing all import tariffs. Also in 1992 all subsidies, support, and cheap loans to businesses were stopped, forcing them either “to die or to begin working efficiently.” With tax reform, “we had to make clear that if somebody works more and earns more, he will not be punished.” Taxes were decreased sharply and a flat tax was instituted. There is no tax on corporate income that is reinvested. “We realized quickly the danger of extensive reliance on aid” and adopted a “Trade, not aid” policy in 1993.
While the Heritage Foundation rates the Economic Freedom of the world’s nations annually, the Fraser Institute and the National Center for Policy Analysis rate the comparative Economic Freedom of the American states and Canadian provinces. Even though these 60 sub-national governments equally enjoy some beneficial fundamentals, such as the rule of law, the differences are significant. For example, the top rated state scored an index of 8.2, while the 50th ranked state scored only 5.7. This translates to a wealth difference of $7,391/capita. A differential of 0.1 in the index represents a $295/capita wealth difference. Greater wealth is a magnet for both new jobs and new talent.
Colorado is tied for first place ranking with Delaware, South Dakota and Tennessee. However, the other three states are improving faster than Colorado. Unless Colorado commits to more aggressive policies favoring economic freedom, it will fall to 4th place or worse next year.
The structure of the index should not dictate Colorado policy. But, it may provide clues about where to improve. The index is composed of 10 variables that are combined into 3 areas that are then combined to yield the overall index. The three areas are: Size of Government; Takings and Discriminatory Taxation; and Labor Market Freedom. Colorado ranks among the top 5 states in all areas except “Takings and Discriminatory Taxation”, where Colorado comes in 15th. “Taxes that have a discriminatory impact and bear little reference to services received infringe on economic freedom.”
Some Colorado taxes are used disproportionately to redistribute wealth, rather than to recover the costs of government services from those who use them. Fewer taxes, lower taxes and less regulation would help create jobs and add to the wealth and freedom of Colorado citizens.
Communist politicians know something that American politicians have yet to grasp: governments must get smaller.
The Independence Institute
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INDEPENDENCE INSTITUTE is a non-profit, non-partisan Colorado think tank. It is governed by a statewide board of trustees and holds a 501(c)(3) tax exemption from the IRS. Its public policy research focuses on economic growth, education reform, local government effectiveness, and Constitutional rights.
JON CALDARA is the President of the Independence Institute.
DENNIS POLHILL is a Senior Fellow at the Independence Institute.
OROGDOL SANJAASUREN is a visiting scholar from Mongolia studying free market economics in the United States.
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